OPINION — Prompted by the heavy influence of national real estate brokers and their lobbyists, Utah’s 2019 Legislature repealed an important longstanding consumer protection in passing Senate Bill 121.
If SB 121 becomes law, real estate brokers and home builders will be allowed to own and control local title agencies to whom they will steer their captive clients. These types of arrangements are referred to as Affiliated (Controlled) Business Arrangements (AfBAs) and are legal in many other states – yet they are notorious for increasing closing costs to consumers and creating unnecessary conflicts of interest in the real estate closing process.
While proponents of SB 121 use the buzzwords “free market competition” and “deregulation” to justify their positions, an honest objective analysis of the facts and circumstances shows that SB 121 is nothing other than a money grab by large real estate brokerages and homebuilders, who will be the only beneficiaries of this law change. The process by which SB 121 was pushed through Utah’s legislature was a classic example of legislative railroading.
Herbert should see through the special interest rhetoric and manipulative tactics and veto SB 121 to make a statement that public policy in Utah cannot be so easily manipulated by special interest groups.
Buying and selling real estate is likely the most significant financial transaction in which most people will ever engage. Local Utah title companies provide important title search and examination information to buyers, sellers and lenders and make critical closing decisions based on that information.
Most people will agree that it is unnecessarily risky if the person making these important decisions in the transaction is the real estate broker who has a large sales commission riding on the deal closing, or the home builder who is actually the seller of the subject property. Title companies are charged to behave as impartial referees or judges in the closing process. A person who is an interested party to the transaction should not be the owner of these vital and impartial safeguards, yet this is exactly what SB 121 will allow.
A title company is much like a real estate appraiser whose independent assessment of property is necessary so all parties to the real estate transaction have the objective and truthful information they need to make well-informed buying, selling and lending decisions. Otherwise, the potential for fraud is greatly increased.
Allowing a title company and settlement agent to be owned and controlled by a party to the transaction is similar to allowing the property seller to also be the appraiser. Would any informed real estate buyer be okay with having the seller of the property also be the appraiser?
To guard against market manipulation and conflicts of interest resulting from the AfBA business model, Utah’s legislature effectively outlawed AfBAs in Utah in 1985 by passing Utah’s Controlled Business in Title Insurance Law (“CBTI Law”). This law has protected Utah consumers for nearly 35 years by safeguarding the ability of Utah title companies to operate as independent, impartial fiduciaries in the real estate settlement process.
Now, in 2019, SB 121 will repeal Utah’s CBTI Law for the sole purpose of allowing real estate brokers and home builders to own, control and receive hidden profits from Utah title companies. The promoters and sponsors of SB 121 used pretext, misdirection and surprise tactics in their preplanned and coordinated effort to railroad the bill through the legislative process.
I am confident in our legislature’s ability to make sound decisions when they have truthful information to work from. But the railroading of SB 121 by bill promoters made a mockery of the legislative process and misled many legislators who are working hard to do the right thing for Utahns.
Legislative railroading spurred on by special interests
Many of us in the title industry who actively watched and listened as SB 121 went through the legislative process believe that Utah’s Legislature was manipulated by special interest groups into passing SB 121. We think that at the very least there should have been a more robust debate, more honest deliberation, and a more methodical approach to this bill considering the significant impact it will have on Utah’s title industry and for Utah’s consumers.
For example, in Colorado, when a similar law change was considered, interested parties there deliberated over the new law for over one year. Here in Utah, there was no advance-warning given by bill promoters and sponsors to anyone in the title industry or mortgage industry about the bill. Once the bill was introduced, it was pushed through the process at an accelerated pace and legislators repeatedly heard misleading information from bill sponsors and promoters, without opportunity for any opposing or alternative viewpoints to be seriously considered.
It is no secret that Utah’s legislature and state politics are heavily influenced by the real estate industry. Many members of the legislature have ties to real estate and home building. The single largest donor to Utah state legislators in 2018 is the Utah Association of Realtors. By industry, the second largest donor to legislators (second only to health care) were real estate agents.
State Senate President Stuart Adams and House Speaker Brad Wilson are developers/home builders and Herbert is a former real estate agent. SB 121 was sponsored by state Sen. Dan Hemmert and state Rep. Mike Schultz. Hemmert’s largest donor in 2018 was the Utah Association of Realtors. Schultz is a home builder himself.
In attempt to make it appear that their support for SB 121 was not self-serving, bill sponsors and real estate brokers promoting SB 121 used a few one-liner type arguments in support of SB 121 that were misleading or disingenuous.
An assessment of SB 121 reveals that every argument used by real estate lobbyists and bill sponsors to promote and pass SB 121 is objectively false. Every. Single. One. This can be verified by a bit of research and by listening to the testimony in the legislative committee hearings and floor “debates” for SB 121.
(Mis)representation No. 1: Utah’s CBTI Law should be repealed because it is out of date.
Reality: This law is more relevant than ever. It is a consumer protection law. When did consumer protection become outdated?
(Mis)representation No. 2: Federal law – The Real Estate Settlement Procedures Act (RESPA) is enough to protect Utahns so Utah’s CBTI Law should be repealed.
Reality: RESPA was already in place when Utah’s CBTI Law was enacted in 1985 to give additional consumer protections that RESPA doesn’t provide. RESPA was enacted in 1974 to protect consumers from having to pay above-market-rate settlement costs resulting from hidden kickbacks paid among settlement service providers.
Title companies rely almost exclusively on business being directed to them by real estate brokers and homebuilders, rather than from the end consumers who are the actual payers of their services. Because consumers typically purchase title insurance only a few times in their lifetimes, consumers typically rely on recommendations for a title company from their real-estate agent or builder. As a result, title companies have historically been strong armed to secretly pay money to these referrers of business – often referred to as kickbacks.
The costs of these kickbacks ultimately get passed onto consumers. After RESPA made these kickbacks illegal, real estate brokerages and home builders found that an easy way to circumvent the spirit of the law and continue to receive kickbacks was for them to become an owner or part owner of a local title company to whom they would steer their clients to. Their kickbacks could then be more easily hidden and disguised as distributions of profits.
Back then, these arrangements were commonly known as controlled title business arrangements. It was unclear for several years whether these arrangements were lawful. After receiving pressure from the national real estate lobby, in 1983 Congress passed amendments to RESPA to allow for controlled title insurance business arrangements. In response to this, Utah’s 1985 Legislature passed Utah’s CBTI Law to effectively outlaw controlled (affiliated) title business arrangements in Utah.
Utah’s CBTI Law was enacted to override Congress’s allowance of AfBAs in an effort to protect Utah’s consumers against abuses and conflicts of interest inherent in the AfBA model. Utah’s legislators in 1985 clearly did not think RESPA was enough back then. Nothing has changed since then. In 2019, RESPA alone is still not enough to protect Utahns from being exploited by higher costs and hidden information.
(Mis)representation No. 3: AfBAs allowed by SB 121 offer consumers more convenience and less cost when closing real estate transactions.
Reality: This is a favorite and historic way for national real estate brokers and their lobbyists to promote the AfBA model. But these “benefits” are easily debunked.
The objective reality is that there is no benefit to consumers. The convenience of the ‘one-stop-shopping’ idea has been proven to be a myth, and real estate closing costs to consumers go up in markets where AfBAs operate. (See additional discussion under Truth About AfBA heading).
Further, and more directly, SB 121 actually specifically places statutory limits on AfBAs from sharing offices with their real estate broker / home builder affiliates (see Section 31A-23a-1103 of SB 121), and another existing and longstanding Utah title insurance rule specifically prohibits such office sharing among title companies and builders/realtors (See R592-6-4), and this rule will not be repealed by SB 121.
So, there will in reality be no such thing as ‘one-stop shopping’ in the real estate closing process in Utah notwithstanding the passage of SB 121. Yet promoters of SB 121 continue to mislead legislators and the public by spreading the myth that SB 121 will allow for ‘one-stop shopping’ in real estate settlement services.
The term “one-stop shopping” in this context is nothing but a meaningless buzz word that has been used repeatedly by real estate lobbyists for decades. SB 121 will not result in any improvements or benefits to consumers of real estate settlement and title services.
The only persons benefiting from SB 121 will be large real estate brokers and home builders who will be able to steer their captive customers to the title companies they own and profit from.
(Mis)representation No. 4: Utah’s CBTI Law represents an unreasonable restraint on trade and competition and should be repealed in the name of “Business Deregulation” and “Free Market Competition.”
Reality: Really!? SB 121 allows for CONTROLLED business. ‘Freedom’ and ‘Control’ are diametrically opposed concepts. This argument is patently absurd. AfBAs are notorious for hiding information and stifling competition – hardly free market principles. (See additional discussion below in Truth About AfBA Section).
Additionally, Utah’s CBTI Law repealed by SB 121 is two pages. The new law is 15 pages and requires significant additional and new regulatory oversight and administrative reporting burdens on Utah businesses, not to mention the burden that our court system will surely endure to test the new law.
If the reason bill promoters and sponsors pushed for SB 121 was really for deregulation, then they clearly missed the mark.
(Mis)representation No. 5: Those opposing SB 121 are only local title company owners and they are only doing so to protect their “monopolies” and that there shouldn’t be a law that prohibits real estate brokers and builders from owning title companies.
Reality: There is no monopoly in Utah’s local title industry. There are over 200 Utah title companies. The barriers to operate a Utah title company are relatively small. And, Utah’s CBTI Law does not prohibit real estate brokers and home builders from owning a title company, so long as the prevailing reason for their ownership is not to derive financial benefits from referring their clients to that title company.
Utah’s CBTI Law just seeks to regulate the inherent conflicts of interest and potential for abuse that exists in a situation where a title company and builder or real estate broker are all owned and controlled by the same person or persons.
Under Utah’s current law, if a real estate broker wants to simply invest in or own a title company in Utah, he/she is free to do so – so long as the purpose of it isn’t to financially benefit from referring business to that title company.
However, real estate brokers behind SB 121 are only interested in owning a title company if they are also legally able to steer their captive customers to close there. They are not interested in engaging in the title insurance business on a level playing field or contributing anything of value to the title industry.
(Mis)representation No. 6: Interested parties had been discussing this bill for months prior to its introduction.
Reality: No one in the title industry, or any other interested industry (mortgage, legal, et cetera) knew about the bill until its introduction by real estate broker promoters immediately prior to the start of the legislative session.
The Utah Land Title Association (ULTA) only received credible information that the bill was coming one day before it was released. The message we received from these actions was clear, the proponents of this bill intended to rollover the title and mortgage industries before any alternative viewpoints could be considered.
(Mis)representation No. 7: SB 121 represents a bargained for and agreed upon “consensus” between the real estate and title insurance industries.
Reality: Title industry “representatives” were bullied to the table and forced to “negotiate” a change they didn’t want or even expect. Then, lawmakers were misled to believe that the title insurance folks supported this bill at the rate of 80-90 percent of practitioners. And bill promoters are still telling this lie! The ULTA was bullied into accepting SB 121 – but the ULTA does not speak for the title industry in Utah.
There are over 200 title agencies in Utah. Only about 60 of them are members of the ULTA. Yet bill sponsors in committees and floor debates incorrectly stated that the ULTA represents 80-90 percent of the title industry in Utah. Bill promoters to this day are now spreading the lie that 80-90 percent of Utah title practitioners are in favor of SB 121 when nothing could be further from the truth. Aside from a few persons in ULTA leadership positions, the majority of title agencies who are members of the ULTA are opposed to SB 121 in any form.
Yet in committee hearings and floor debates, bill sponsors told other legislators that SB 121 is a consensus bill and misused this alleged “consensus” to preclude any real discussion or debate in the legislature about the realities of SB 121. I have worked in Utah’s title industry for nearly 20 years.
I am the director of a title professional trade association that has the support of hundreds of Utah licensed title practitioners and others working in Utah’s title industry. I know the industry and I know the people working in it. The reality is most if not all title insurance practitioners in Utah are opposed to SB 121.
If you have any doubt, just ask them! In honest conversations with title insurance practitioners you will find they are overwhelmingly opposed to SB 121. But make it a private conversation. Many title practitioners are literally under the duress of threats of retribution if they openly oppose SB 121 from their real estate broker clients to whom they are beholden for the business that comes to them. This position of real estate broker dominance and their ability to exploit this imbalance of power to extort kickbacks is one reason why Utah has the CBTI Law in the first place.
The truth about affiliated (controlled) business arrangements
In states where AfBAs are allowed, they have proven to be a threat to consumer welfare by eliminating meaningful consumer choice and driving up closing costs. The real estate brokerages and builders who profit from AfBAs do so at the expense of the consumer by getting paid what would otherwise be considered illegal kickbacks or inducements for the referral of title business.
SB 121 will essentially legalize such kickbacks, allow for monopolistic type arrangements in the real estate settlement process, and create strong financial incentives for real estate service providers to exploit, manipulate and abuse their captive customers, often without the customers even realizing this is happening.
A careful and critical examination of the true nature and history of AfBAs gives ample evidence that not only do they offer no benefit, they are costly and harmful to consumers of real estate settlement services.
AfBAs increase closing costs and create less transparency
AfBAs are in reality anti-competitive monopolistic arrangements. To understand why this is so, it is necessary to understand that the nature of the title business is different than other businesses. Consumers do business with a title company only a handful of times in their lifetimes, so they do not typically shop around for the best title company to work with. Instead, they almost always rely on their real estate broker to refer them to a title company. This arrangement works fine if a real estate broker has only his clients’ best interest in mind when selecting a title company.
However, this arrangement can create conflicts of interest if the real estate broker making the referral has a financial interest in the title company recommended. If a real estate broker has an ownership interest in a title company, he will almost always steer his/her clients to that title company, regardless of the price or quality of service, and he/she actually has an incentive for that title company to charge the client more – not less. This has been proven to be the case in states where AfBAs operate.
For example, in Congressional testimony given before the U.S. House Financial Services Committee on April 26, 2006, Douglas R. Miller, Esq., speaking from his experience working in the real estate and title industry in Minnesota, where AfBAs are allowed, sated as follows: “In a controlled (title) business model, the consumer savings for shopping and comparing title companies are pocketed by real estate professionals. Because real estate brokers have a captured audience who will pay whatever they are told, the incentive is to constantly raise prices. The success of controlled title business is measured by ‘capture rates’ which has nothing to do with providing good service, but everything to do with exacting more money from consumers through the misuse of fiduciary responsibilities.”
In a study performed by Mr. Miller, he estimated that AfBAs cost consumers in Minnesota $63 Million in needless fees over a two-year period. In the AfBA business model, although the existence of the AfBA is required to be disclosed to the consumer (buried under a pile of other documents), the real estate broker’s or home builder’s actual profit share and dollar amount received from the controlled title business arrangement is not required by law to be disclosed. The AfBA then becomes an avenue for real estate brokers and builders to increase their revenues from each of their clients’ transactions in a way that is non-transparent and easily hidden from their clients.
This steering of title business does not in any way create “market competition” or provide anything of value to consumers. These arrangements are essentially shams set up as an arrangement for realtors or home builders to receive kickbacks from title companies that would otherwise be unlawful. Kickbacks inevitably lead to increased real estate closing costs that consumers pay.
AfBAs create unnecessary conflicts of interest
The AfBA model allows for unnecessary conflicts of interests to exist in real estate transactions. The independent and impartial role of the title company is relied upon by buyers, sellers, lenders, real estate agents and others to provide objectivity, transparency and integrity in the closing settlement process.
The title company/settlement agent is charged with fiduciary duties of care and impartiality that should not be jeopardized or compromised by the obvious conflicts of interest that become prevalent if home builders and real estate brokers own title companies to whom they will steer their clients. If SB 121 becomes law, it will be difficult if not impossible for title companies to maintain impartiality and neutrality.
The concept behind escrow and escrow closings is that parties to a transaction are self-interested which can create a lack of trust between them. A disinterested and impartial escrow settlement agent / title company is therefore engaged by the parties in real estate transactions to assure that all parties’ interests are equally considered and represented. If the escrow settlement agent / title company is owned and controlled by one of the parties in the transaction, what is the point of the escrow?
Example 1 – Preferred scenario, that exists under Utah’s current law: Buyer contracts to buy a newly constructed home from Home Builder. Buyer deposits funds for the purchase with an independent neutral third-party title company, who holds funds in escrow. Title company releases funds to Home Builder only after the home is complete, title insurance is in place, and the deed transferring title to Buyer has been properly recorded with the County.
Example 2 – Scenario that will exist if SB 121 becomes law: Buyer contracts to buy a newly constructed home from Home Builder. Home Builder requires Buyer to deposit funds for the purchase with a Title Company that is owned and controlled by Home Builder.
Home Builder makes a profit from the escrow arrangement through its ownership interest in the Title Company (and that profit is hidden from the Buyer), and yet the essential point of the escrow is absent: The Title Company in this scenario, by definition, is not a neutral third party.
Does the Buyer truly understand this situation and is he/she really okay with it? If so, the Buyer might as well deposit funds directly with the Home Builder, avoid paying any title insurance or settlement fees at all, and assume whatever risks may result from such an ill-advised approach, unwisely trusting that the house and ownership will be delivered as promised, but with no third-party safeguard in place to protect him/her if it is not.
SB 121 will create unnecessary conflicts of interest in Utah’s real estate / title industry and will ultimately increase the costs Utahns will pay when buying and selling real estate. The only reason for SB 121 is to create a legal framework that allows builders and real estate brokers to increase their profits at the expense of Utah’s consumers and in ways that are hidden from them. Herbert should be encouraged to do the right thing for Utahns, and veto SB 121.
Submitted by TYLER J. TURNER, Salt Lake City.
Turner is the executive director of the Utah Association of Title Professionals, a grassroots nonprofit organization quickly formed to give a voice to the sentiments of Utah title insurance industry practitioners in the face of SB 121. Turner is a Utah licensed title officer, escrow officer and attorney practicing in Utah since 2000.
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- Read full text of bill: Utah 2019 Senate Bill 121 — Controlled Business in Title Insurance Repeal
- Contact legislators
- Bill sponsor: Sen. Daniel Hemmert | House sponsor: Rep. Mike Schultz
- Southern Utah Sens. Evan Vickers, Don Ipson, David Hinkins and Ralph Okerlund| Listing of all senators.
- Southern Utah Reps. Travis Seegmiller, Bradley Last, V. Lowry Snow, Walt Brooks, Rex Shipp, Merrill Nelson and Phil Lyman | Listing of all members of the House of Representatives.